Vitru Ltd (VTRU) 2022 Q1 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to Vitru's First Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded and will be available on the Vitru's IR website.

Now I will introduce the host for today's conference call, Mr. Carlos Freitas, Vitru's CFO. You may begin.

Thank you, Blaire. Good evening, everyone. Thanks for joining us today. It's my pleasure to be here with you all for the release of our fourth quarter 2020 numbers. Here with me are Pedro Graca, our CEO; Maria Carina Gonçalves, the Head of our IR department; and [Raquel Sasaki] with [Felipe Filho] and [Educational Tier], also from our Investor Relations team.

A slide presentation will be part of today's webcast, which is available at our Investor Relations site at investors.vitru.com.br. And before we begin, I'd like to make note that as detailed on Page 3 -- in fact, 2 of our presentation, safe harbor is in effect for this call.

So now I invite you to go to Page 5 of our presentation that I trust you all have in front of you.

Now on Page 5, we have the main highlights of this quarter. Again, the number one, as you know, the antitrust authority of Brazil CADE has approved the business combination with Unicesumar that we announced in August of last year. We are still in the middle of the 15-day additional waiting period for the contract to close which is -- the period is going to finish tomorrow. So the 15-day period will be due tomorrow on 7th of May (sic) [17th of May].

And after that on Wednesday morning, we're going to tell you the day in which we're going to invite you for a new conference call and to define the date of the closing. Still on Page 5. We reached almost 382,000 digital education students which was an important landmark.

Our intake in the first quarter of this year increased 36% in our core business, which is our digital education undergraduate. This was as I said, a very important growth, 36%. In the calendar quarter, we don't expect this number to be at the same level of the full intake cycle. As you know last year the whole process was much more back-ended and then I want to go back to this. But anyway, we still expect the intake for this curve intake cycle to be around mid-20s, higher than what we had last year.

On Page 6, not only we grew a lot, but also we increased average ticket in our Digital Education segment which grew 8.5% on average comparing the first quarter of this year to the first quarter of last year, which reached more than BRL 300 per month per student, which shows and confirms the resilience of our model and how, let's say, how we are positioned different than the other competitors. With that, the net revenue in our core business grew around 30% this quarter compared to the first quarter of last year, while the overall consolidated net revenue was 18% higher than what we had last year.

Regarding margins, our margin was stable at 28 -- 26.7%, sorry, this quarter, which means that our adjusted EBITDA grew again 18% compared to what we had last year.

And finally regarding adjusted cash flow from operations, we had an increase of 20% more or less reaching BRL 47 million in the first quarter of this year, which means a cash conversion of 115%, again higher than 100% that we had last year. So now before we jump into the numbers of the first quarter. I just want to remind what we have been doing, what we have been delivering over time on Page 8. So as you -- just quickly as you know, we had our IPO in September of 2020.

Since then, we have been expanding and reaping up our current hubs. Since then, we have been expanding and ramping up our current hubs. In the last 12 months, we went from 62% of students in expansion hubs to now 70%. We reached around 980 hubs, increase of 240 hubs, more or less, in the last 12 months. A big chunk of them in the Southeast. In the Southeast, we have now 258 hubs. And today, already our second biggest state in terms of hubs in São Paulo. So we are delivering on what we said, which was that we were going to go in the Southeast.

Also, expanding course offering, again, nursing was a big revenue contribution this quarter as it was in the fourth quarter of last year and we are eagerly waiting for the net authorization that offer psychology and later on, law. And finally, inorganic growth into hub which, as you know, is a major transformational deal for the whole sector.

So on Page 9 more detail on the ramp-up of our current hubs. As you know, we are still maturing most of our hubs. Nine -- more than 9% of our hubs are still maturing. Those are the hubs that were open in the last 2, 3, 4 years.

And the current Maturation Index of this hub is around 37% which means that if we decide not to offer any more hubs going forward, we're still going to grow in this hub more than [106%], almost [200%]. So this growth is limited in the Q2, because the most important driver of growth going forward for Vitru is the maturation of the hubs we have so far, which already represents 70% as I said, of all our team base that we have today.

On Page 10, the overall expansion of our hubs and scaling base throughout the country as you can see in the last 12 months, we have been growing throughout the country, not only in the higher, I'd say, impairment region, which is a South Region of Brazil in which we grew 16% in the last 12 months but also in the center with almost 40% as well in the Southeast, 25% -- 34% in the North of the country.

So we are going through our review that we have been doing the last year. And we increased, as well, by 32% the number of hubs in the last 12 months. And again, the most important region in terms of number of hubs is now the Southeast with 258 hubs.

And on Page 11, just to recap again new courses. We have been opening working and we are eagerly waiting for law and technology, which is going to be another very important revenue contributor for us -- for Vitru going forward.

And on Page 12. Just another reminder of what's in the Northeast. They reached 1,000 hubs in December of last year. They have 1,700 medical students and still ramping up.

They are going to reach around 2,500 students in medicine education up 726 or 727. They had a 40% EBITDA margin in 2021 with BRL $290 million in adjusted EBITDA and a 32% CAGR in a number of students. So this is a major component that we are combined with. As I said, we are going to close this very soon once the 15-day period from [CAGR] are expired and we are ready for it.

We have gone through a full-fledged preparation for the integration. And once we finish this in the waiting period, we are going to invite you all for a new conference call with more details about the integration, about [student] hub, and of course the synergies that we expect to have from the combination.

On Page 13, as you know, we are going to maintain both brands because they do set into different markets, they attract different people. And here on the right part of the slide, we have illustrated the chart with the latest figures from the [net census] in which we have been growing again more than the markets have been gaining market share. The whole market has been growing at around 21%. But we -- within this growth segment, we have been gaining market share on a year-to-date basis. So now, UNIASSELVI and Unicesumar we have around 20% of the market. And this is levered on our, I'd say, focus and technology and reputation.

On Page 14 you can see that when you see the public validation from our clients, the students when they evaluate our apps for example which go from -- up to 5 as you know either in Play Store or Apple Store. The grade -- the weighted average grade of Unicesumar is 4.7 while the one of UNIASSELVI is 4.6 which are the highest in the market when you see the whole university academic apps in Brazil.

And also when we see Reclame Aqui, this is the reputation of a brand and how we are perceived by our customers both in the South and to the North has the highest grades among the university players in Brazil.

So now on Page 15, we start, first of all, on the numbers for this quarter. We grew by 26% in our digital education undergraduate student base which is 342,000 students and overall growth to 382,000 students in digital education including graduate courses.

When we see our core business, in the intake as I said, we grew 36% reaching 179,000 students in the first quarter -- the first calendar quarter of this year. The intake is still going on. We still have more couple of weeks in intake for this current year. So what we do expect is a, I'd say, slightly smaller in-state growth this year.

As you remember, last year the whole [end-to-end] process was delayed. So the whole intake process was much more back-ended than what we had this year. So the comparison base of the curve, the profile is different. But anyway, we expect to have mid-20 growth in intake in the current intake cycle this year.

On Page 16 just to illustrate that growth have been spread throughout our cohort. As you know we defined cohorts and the group of hubs that were opened in a given year. So in all cohorts we have been doing, as you do, and this maturation of the hub is an important piece in our growth engine and in fact the most important driver for our growth going forward. So now we expanded from 272,000 students to 342,000 students enrolled as of the end of March of this year.

On Page 17, we'll start with financials. The net revenue, as I said, growing at 18%, reaching BRL 178 million in the quarter, a slight decrease in the gross profit margin and I am going to explain this word to you. And adjusted EBITDA with a stable margin at 27% in this quarter.

When you see the performance of net revenue per segment on Page 18, as I said a 30% increase in our core business, digital education undergraduates which now represents 8% of overall net revenue And we had a decrease in consumer education and on-campus undergrad business which I will explain a bit later.

So on our core business, Page 19. A 30% increase in net revenue and a 9% -- 8.5% or 9% increase in average ticket reaching more than BRL 300 this quarter. So this is an illustration of a confirmation of how -- of the resilient and difference between we are positioned in a different way in the market. And we have been offering a hybrid event model, which is different from most of the peer.

And we are, I'd say, we are seeing overall market much more, let's say, rational commercial approach from all the peers. And even apart of that, we are growing our ticket review by around 8.5%. Remembering that last year in the second quarter of last year we grew 6%, in the second quarter of '20 we grew 4%. So again, we are expanding average ticket slightly below inflation, but explain a lot Brazil base.

Important to highlight that most of the increase in ticket is not due to a mix effect. And I mean, we all know that there is a mix effect, given that we are increasing the weight of our [uni] courses, being [health and administration], which has average ticket of a bit more than BRL 400 per month. Both quarters amounted to less than 21% of this base in the first quarter of last year and now they represent around 25%. And out of this 8.5%, 9% growth in average ticket 2 points -- 2 basis points is accountable to this mix effect, which means that 6.5% is due to an apple-to-apple comparison.

Anyway we expect the relative weight of future quarters to keep improving over time, not only because of a higher competition overall in our current courses, but also as I said before the near future with technology and law.

On Page 20, we have a decrease in revenue of continuing education and on-campus education. Regarding continuing education business, in the last quarter this has been negatively impacted by the reduction in the average duration, average length of our graduate courses. So this is the market trend which is, in fact, not only virtual by several other players, by the way. And anyway it's important to highlight most of the shift now is over. So the reduction has taken place throughout last year.

So we do -- As I said, the most of the shift is over and net revenue this quarter was already higher than what we achieved in the fourth quarter of last year and we do expect that the net revenue in the second quarter of this year showed is higher than what we achieved now in the fourth quarter of this year.

Looking with a more medium-term view besides revenue record in this segment, our continuing education business includes technical courses and professional qualification courses and we believe this has the potential to be -- it's quite important in the future, an important additional source of revenue for us. And it is part of our overall strategy to expand complementary offerings throughout the students' academic journey.

Regarding our on-campus segment, our intake in this 2022-'21 cycle was a bit higher was 11% higher than what we had last year. But that was not enough to avoid the overall reduction in base and net revenue. We believe that the post-secondary on-campus business are becoming trends -- are becoming secular trends although we, despite of this, will grow this year but coming from quite low comparison basis.

Now, jumping to Page 22 going to the detail about the components of our EBITDA. Cost of service is slightly higher than what we had last year, 2% of net revenue higher than what we had last year basically for two reasons. First one was the lower -- slightly lower contribution of continuing education which is a higher-margin business, it is the higher one we have among the 3 businesses that we have. But also, we had last year a BRL 3 million in cost recovery that was one-off, which represents around 2% of our revenue. So was it not for this one-off effect, our gross margin would have been quite similar to what we had last year.

When we look at G&A, G&A was more stable to what we had last year, which means that we decreased the G&A as a percentage of net revenue from 8.6% to 7.1%. So we are keeping Vitru as lean as possible, should be and to remain as agile and as fast as possible as a company.

On Page 23, selling expenses and PDA. So selling expenses was slightly higher than what we had last year, increasing 1.4 points compared to last year. But the CAC, the cost to acquire a new customer decreased 9% than what we had last year. So we increased 24% the cost of selling expenses, but the intake was much higher than that. So the cash was slightly lower than what we had last year.

And for PDA, we decreased PDA in 2 points from, 16.6% to 14.5%, which was a function of a slight improvement in collection. Our average collection time, number of days was slightly lower than what we had last year. So with that, we were able to get a little bit in 2 percentage point impact on the PDA expenses. And we do believe that going forward this year, the overall PDA for the whole year shall be (inaudible) shall be slightly lower than what we had last year.

So now, on Page 24 for net profit net income, a 66% increase in net income, adjusted net income reaching BRL 26 million this quarter, not only because of higher EBITDA in the period, but also because of higher financial income this quarter. And finally regarding adjusted cash flow from operations, we reached BRL 47 million this quarter, an increase of 20%. Our cash flow conversion was 116%, which means that we have been again generating cash.

We're not only are growing our revenue and EBITDA, but also our cash flow generation. This number here is before CapEx. For after CapEx it was around BRL 10 million this quarter. This would have been around BRL 36 million. Anyway, the important cash flow generation in the quarter, in line with what we have been doing in the last quarters.

So that was it from my side. I think that we have delivered a very nice quarter. Now, I'm going to open for questions.

(Operator Instructions) Our first question comes from Vitor Tomita with Goldman Sachs.

There are two questions from our side. The first if we should expect selling expenses falling year-on-year in the second quarter, given that this year's intake cycle was more concentrated in the fourth quarter.

And our second question would be, if you are considering that smaller M&A deal, if there could be a potential option for increase in your portfolio in continuing education.

OK. I'm going to start with the second one. So yes, you are fully right, Vitor. Thanks for your question, by the way.

Looking forward, we are going to resume activity before the deal with Unicesumar. We were already looking at some potential deals to complement our portfolio, either with graduate courses, either with what's called free courses, either with prep courses for the first job. So the idea is that Vitru, we have, I'd, say a longer relationship with the same customer not only for example during 4 years for undergrad, but also after they leave high school and engage in a prep class to get for job, and then having an undergrad course and then grad course and then a lifelong experience overall for the person. So yes, looking in the new term, we are going to look for more M&A opportunity, including to reinforce our growth rate business.

For the fourth question, I could not hear you. I think that you were mentioning about the intake in the second quarter, right?

Actually, the question was about selling expenses in the second quarter, if we should see an increase as well or that could change given the different seasonality for insights.

Okay. Yes. Selling expenses is related to the intake business, so especially regarding our undergrad business, which is our program. So when we look for the second quarter, we will have not as high a growth in intake as we had in the first quarter, as I said, because last year the whole intake part was much more back-ended.

So when we see the overall intake focus, we shall have a reduction in tax, as I said, for the whole intake segment when we look together at the first and the second of the year.

And much of the initiative and intake in the second quarter would not grow 33% compared to what it was in the second quarter of last year.

Our next question comes from Lucca Marquezini with Itau.

So regarding PDA, the company reported a decrease in the PDA as a percentage of net revenue, which is different from what we saw in most of the companies in the sector. Was one of the reasons for the PDA was a lower contribution from continuing education segment?

What should we expect for the PDA for the rest of the year? Should we see an additional dilution? Or should we consider this as a new normal level for this expense line?

Hi, Lucca. There was some noise in the line, but I'm going to answer what I think you're asking. But if it's not the right question, please correct me. So dilution of PDA overall when you see the whole year for example, we shall expect a slight reduction in PDA overall this year compared to what we had last year for a number of reasons.

The first one is that part of the overall experience of the Vitru is to meet colleagues in hub for those centers that do have physical encounters in the hubs. Those guys, they started to mitigate all, in some cases for the first time, this year, effective in April this year. So, by the way, all the results in the first quarter of this year were before the start of the physical meeting in the hub as we started in April of this year. So this is an important engagement sector for the class.

So, and our model lies on a number of foundations. First one is the tier. The second one is the meeting in hub for those types of visits in the hub. So those guys that have physical meetings in hub are again, or for the first time for the newcomers, meeting their colleagues, and this engagement with the classmates is important for the overall process at which represents a higher retention rate and with that, lower fee generations. So for this year, we do believe that the overall PDA ratio will be small for this reason.

The second reason is that last year, and in particular, in training, we grew a lot. We have a 40% growth in the second quarter of second half of '20 in terms of intake, which as will impact drop-off in PDA in '21. So for now we have a slightly smaller percentage of newcomers that started with us last year than what we had 1 year before. So the weighted average of the profile of the firm, if we have less newcomers than what we had the 1 year before. So these two sectors shall mean a slightly lower PDA ratio this year at a percentage of net revenue.

Can you repeat the first question because I could hardly hear you?

No. That was all regarding PDA and you made it very clear.

(Operator Instructions) Our next question comes from Mauricio Cepeda with Crédit Suisse.

So I have two questions. One, I'll go back to the seasonality aspect. We were talking with your competitors during this earnings season, and we noticed that this -- the seasonality in distance learning in general is something that seems to have changed for the industry, right? And I know that you are a little bit more cautious of that because of the modular process and other value proposition you have. So how does seasonality change affected the competition in the first part of the question.

The second part of the question, how it interferes with PDA or evasion and other parameters that we were much more used to see in kind of alternated fashion between even and odd quarters.

And my second question is not related to the operational aspect, but you were close to the closing with the deal with Unicesumar. And we know that the capital structure were thought about before all this interest rate rises in Brazil. So how this new interest rate scenario could change the way you were thinking about the capital structure of the new co?

Thank you, Mauricio for two questions. The first, one regarding seasonality and PDA. You're absolutely right. I mean, we were already used to this. I'd say we are much more spread intake cycle throughout the year because of our modular academic approach. And so we realize our intake goes up to end of May for the fourth semester of a given year. And we do see competition which used to finish intake around mid-April for that to be realized. Now, they extended more – a few more weeks. But at the end, there's a need for that. Because we do have a modular approach to the segment. We can attract people in a given month for example and that subject -- that the person did not attend, he or she can attended and re-attend later on. And when you see the competition, because they do have for example 5 parallel subjects in a given semester you have a practical limit for that. So you realize for us there was no real change, or no important change in our overall intake process and same for PDA. For PDA, it is already reflecting that.

What we had last year was out at the point of the curve, which was much more back-ended increase with now this year is I'd say something between what we had in '20 and '21. And I think it's the new normal what we are seeing this year. So slightly more back-ended than what we had a few years ago, but not as much as we had last year.

Anyway, the closing and capital sector indeed we are close to closing. We have secured a firm credit line from four top-notch banks in Brazil. So there will be a 5-year financing from those banks. But, of course, we are looking to accelerate the deleverage of the company.

We're going to start with a quite high leverage. The company, the new Vitru so the marks [plus the service] do generate a lot of cash, and so we can deleverage over time but we are not going to sit and wait for that because we realize as I said before, we are going to look for further M&A opportunities and it is not a surprise that the current interest rate is higher than what everybody thought 1 year ago.

So for that we have a number of options. And the first one is to go from up and raise capital in a follow-on once their market is open, which is not the case today. Second one, we could also have a product segment. And we do have a number of parties that are looking for that. And the -- and of course there's also on the table the potential sale of the medical business that we're going to buy now, which a lot of people in the market that is asking us whether we're going to sell it next or not.

There's no decision so far whatsoever. But that discussion will take place at the Board after the close of contract and it is a possibility to back medical division and select to other peers that are more focused on that than what we are.

So we have the 3 possibilities. We don't have any words for that, but we do have options to accelerate the leverage if we see fit.

(Operator Instructions) There are no further questions. I'd like to turn the call back over to Carlos Freitas for any closing remarks.

So thank you all for your interest in Vitru, and our team here is more than available to answer any product question you have. Thank you, and good night.

This concludes the conference call. You may now disconnect.